It was mainly due to the increase in capital gains and their ability to curtail return on deposits

Research Analyst, InvestCap

May 19 - 25, 2003

Commercial banks in Pakistan have posted huge growth in their profitability for the year 2002. This is contrary to earlier expectations, as declining interest rates during the outgoing year were supposed to adversely affect the operational performance of the banks. In January 2002, 6-month T-bill cut-off rate and 10-year PIB stood at 8% and 12%, respectively, as against 4.4% and 5.6% at end of December 2002. The main reason for significant performance of banking sector was the ability of the banks to pass on reduction in interest rates to the depositors. Moreover, higher capital gains on investment and lesser provisioning against NPL also supported the banking sector's bottom line.


There were 41 scheduled banks in Pakistan in 2002. Earnings of 4 banks are still not available. Moreover, 4 specialized scheduled banks are also not taken. A new player, Meezan Bank, is excluded in order to maintain comparability. Similarly for better comparison, Grindlays and Emirates Banks that merged last year have also been taken in 2001 analysis. The figures for banking sector are based on 32 scheduled banks.

Net Interest Margin (NIM) of the banking sector increased by Rs 3.9 billion or 7% to Rs 58.6 billion in 2002, as compared to 2001. In percentage terms also NIM posted healthy growth. This increase indicates remarkable performance on part of banks despite declining interest rates in the economy. This also indicates banks' ability to pass on burden of reduction in interest rates to depositors. Mounting banking sector deposits, that grew by Rs 240 billion or 18% according to SBP statistics, also contributed to better NIM for 2002.

The other reason for the increase in banks' profitability is increase in non-interest income, which increased by Rs 4.3 billion (17%), in 2002, touching Rs 29.2 billion. This can be on account of huge capital gains booked on investments during 2002. On the other side non-interest expense did not increase significantly in 2002, as banks have lowered their provisioning (mainly for non-performing loans) by Rs 3.7 billion (33%) to Rs 7.8 billion in 2002 from Rs 11.3 billion in 2001. Extraordinary items especially that of United Bank (write-off of Rs 7.2 billion) and NBP (amortization of Rs 2.7 billion) in 2001 highly understated 2001 earnings. For better comparison these items are excluded. Based on this, profit before tax of sampled banks grew by 38% to reach Rs 30.3 billion in 2002.


Profit after tax (PAT) of the private banks increased by around Rs 1.5 billion (68%) to Rs 3.7 billion for 2002 as compared to 2001. Main contribution in the increase of PAT in 2002 came from Faysal (showing an increase of Rs 380 million), PICIC (showing an increase of Rs 208 million) and Askari (showing an increase of Rs 137 million). Faysal Bank's figure also includes the impact of merger. Except for the loss making Platinum Bank (now KASB Bank), the rest of the banks posted healthy growth in their profitability for 2002.

NIM of the private banks surged exceptionally. The surge seems to be the result of substantial increase in deposit base of private banks, which grew by around 24% in 2002. Non interest income of the private banks also increased in 2002. Capital gains on investment contributed most towards this increase. Analyzing capital gains on investment of three major private banks namely Askari, Soneri and Union (considered representative of private banks), it is observed that around 50% of the increase in non-interest income came from this, made possible due to the fall in interest rates in the economy.

On the other hand, non-interest expense of the private banks also increased thereby capping to some extent the benefits of rising NIM and non-mark up income. This increase in expenses was despite lower provisioning by these banks in 2002. It is believed that this increase denotes effects of mergers and acquisitions taken place in 2002 as Union contributing around Rs 523 million towards the increase of Rs 1.5 billion in the non-interest expense.


After tax earnings of the 3 nationalized banks (excluding ABL) grew by 83% (Rs 2 billion) to reach Rs 4.3 billion. Habib Bank and National Bank both reported after tax earnings of over Rs 2 billion. Considering the substantial size of the deposit base of the giants included in the nationalized banks segment, increase of Rs 1.3 billion in net interest margin of these banks seems meager. In 2002, non-interest income of the nationalized banks surged by Rs 1.2 billion to reach Rs 11 billion, whereas, non-interest expenses increased by only Rs 500 million. The main contribution towards surge in the after tax earnings of the nationalized banks came from absence of amortization cost for voluntary separation scheme, worth Rs 2.7 billion mainly from the NBP.

MCB and UBL represent de-nationalized banking sector. In 2001, UBL recorded an extraordinary item of Rs 7.2 billion, which resulted in a loss of Rs 6.4 billion. Hence the direct comparison of de-nationalized banks' 2001 and 2002 earnings figures may not be appropriate. Even after excluding the extraordinary items, profitability of the denationalized banks grew by 3 times to reach Rs 3.2 billion for 2002. After tax earnings of MCB and UBL reached Rs 1.74 billion and Rs 1.5 billion respectively for the out going year.

Net interest margin of the denationalized banks increased by Rs 70 million to reach Rs 15.4 billion. On one hand, non-interest income of the denationalized banks increased by Rs 900 million and, on the other hand, non-interest expense decreased by Rs 700 million.


Foreign banks are no exception to the trend of growing profitability of the banking sector. In 2002, foreign banks have posted 53% growth in their after tax earnings. Last year their performance was also excellent as they posted a profit increase of over 60%. The following figures include figures of 13 main foreign banks (out of 16) operated in Pakistan in 2002.

Many foreign banks headed towards consolidation last year in line with expectations. Big players continued to shift their focus towards local currency based banking coupled with aggressive fee-based activities in light of the fact that party of swap dollar funds and FCAs have virtually came to an end in Pakistan. Rising competition from local banks forced them to introduce new products especially in the field of consumer financing. Smaller foreign banks are somehow trying to curtail their businesses and are seeking to sell out their operations to local groups.

Profit after tax of the foreign banks jumped by 53% or Rs 1.4 billion to reach Rs 4 billion for 2002. Profit before tax also soared by 25% or Rs1.3bn to reach Rs 6.4 billion. Main contributor in the Rs 1.4 billion increase in PAT was due to newly merged Standard Chartered Bank. Reduction in non-interest expenses coupled with the absence of Rs 600 million worth of integration cost in 2002 helped Standard Chartered to post one billion rupee profit for 2002 versus Rs 400 million for 2001 for both the banks. Only one foreign bank posted loss in 2002, while in 2001, three banks were in red.

With low interest rates prevailing in the economy, competition is fierce for placing funds at higher rates and therefore interest based earnings of the banks were bound to get some hit. In 2002, interest income of foreign banks decreased by Rs 8.2 billion to reach Rs 18.5 billion. On the other hand, interest expense decreased by Rs 8.1 billion. NIM, in absolute terms, more or less remained where it was in 2001. However in percentage terms, NIM improved from 27% to 38% in 2002.

In 2002, non-interest income of foreign banks increased by around Rs 200 million to reach around Rs 5 billion. In 2002, the banks have booked huge capital gains on investments. In foreign banks, Citibank stands tall in booking capital gains on investment; gains increased by Rs 364 million as compared to meager amount of around Rs 30 million booked in 2001.

In 2002, non-interest expense of the sampled foreign banks decreased by around Rs 600 million mainly on account of savings from Standard Chartered merger. Moreover, in 2002, foreign banks registered reversal in provisioning for non-performing loans that contributed towards lowering non-interest expenses.